Another finance secret finance professionals won’t tell you (but I will)

One of the more successful finance posts I have on my blog is a finance secret I shared that industry professionals wont. You can find that post here.

Today I have another secret for you, it’s not a true secret as its not actually hidden but unless you are astute in finance you aren’t necessarily going to catch it. It has to do with mortgages, which in the U.S. right now is a hot finance topic. House prices in the U.S. have risen over the last 3 years anywhere from 8-25% depending on what market you are in.  House prices traditionally do not go down, they level off. If we look at a 100 years of house price data, we can only find 2 years where the median average price drops in comparison to the prior year. Again, this is largely aggregated meaning a market like Manhattan is an extreme, a rural town in Montana might be an extreme as well but on average that is where it stands.

So what is the secret? When you go for a mortgage your ability to borrow money is based on your GROSS income, not your net. It’s a trick banks use to be able to lend you more. So your ability to borrow is based on the amount you earned, not the amount you actually have to spend. The bank/lender does not account for health insurance cost, taxes, child support on and on. The good news is people who would otherwise not qualify for a mortgage can based on their gross income.

Borrowing the max amount, is a foolish move.

The bad news is exactly the same as the good, you can qualify for mortgages you would not have the ability to afford because it was based on your gross income, not your net. So you get situations where people borrow too much, you get terms like “house poor” because most of your income goes to paying your mortgage. The kicker? (well there is two) you pay for the privilege to borrow more than you can afford via interest. The other? You pay for PMI (Private Mortgage Insurance) which essentially protects the lender if you cannot pay the mortgage THEY gave you. You know the one they based on your gross not your net.

No lender is going to tell you it’s too much house, unless its WAY overpriced for your income. You have to be the one who figures this out. You need to estimate the mortgage payment and look at how much you actually TAKE HOME a month. You don’t want your mortgage payment to be more then 25-35% of your take home pay. Additionally, you don’t want a 30-year mortgage if you can absolutely avoid it because the interest alone is a killer. Banks want to lend you money, that’s how they make THEIR money via interest. It’s a tough real-estate market out there you have to be extra careful.

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One area where you underestimate your spending.

Inflation is running rampant. Gas prices are off the charts, rent has gone up, interest rates are rising. The key here is your income is likely not matching the pace. Maybe you got a 5% raise last time (if you are lucky). Inflation at 8%+ you’re losing money in nearly every area. Look this post doesn’t have to be long today, I’m not going to fill it up with elaboration on inflation.

There is likely one area in your life where you are underestimating how much you spend. That area is food. Yes, those $4-dollar coffee’s you buy twice a day, that organic ketchup on and on. Food prices rarely go down and the creep on food prices happens gradually. Here’s the rub, that food that you purchase, unless you buy a lot locally, has to be processed, shipped and stocked. All of that goes into the price point. So gas is going up? All of the food you’re buying at the super market was trucked in, someone had to pay for gas to get those products there.

Here is a link to a world food price index Now this is something finance professionals use to gauge real inflation numbers. I’m not suggesting you delve deeply into this. What this site does is aggregates average prices around the world for common food categories (meat, milk, sugar) and comes up with a “global average”. In 2004 the FPI (food price index) was 65.6 today it is 158.5.

I don’t care how much they charge for coffee.

A remarkable increase right? The key here is this never goes back below the prior year’s index. Unlike gas, housing and interest rates food prices keep going up. This is why your food cost is one of the most important budget numbers you have to know because the “price creep” is real. You are always going to be paying more for food, and now with inflation you are paying more for everything so chances are you are starting to lose wealth AKA purchasing ability.

Tighten up your food purchases, make your coffee at home, pack a lunch instead of eating out. Food continues to go up because we all need it; you die without out. Are you over spending here? Are you aware of exactly how much you spend a month on food? I look at how much I spent and I was blown away. I started a victory garden and that helped. Sure I don’t buy tomatoes anymore but coffee? Meh…

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Commodities – Should you invest?

For the first time in a long time we have inflation to the point where it is materially affecting multiple financial sectors. Bonus tip: Anytime oil prices rise, it affects pricing on nearly all consumer products. We also have the artificial inflation of the stock market due to interest rates being kept at historic low levels for over a decade. On top of that you had the pandemic that decreased production and you had governments stimulate with increase payments to individuals. These two factors alone cause inflation, less products and more money = product price increases.

Now before I get to far into this let me give you the normal disclaimer. I am a finance professional with 30 years of experience. These are my opinions based on years of observation, any decisions you make pertaining to your personal financial choices should be done so with a great deal of research beyond my blog posts.

Disclaimer out of the way, what does all of the reality of the first paragraph mean? It means commodities will increase. Oil, Precious metals, specific produce items wheat as an example. Does this mean they are a good investment? Yes, and no, first the no. Buying them now would break the basic principal of investing and wealth building (buy low sell high), you would be buying at a high, don’t do that.

Yes, because a diversified portfolio is a good thing. If you had gold in your portfolio at the start of the pandemic (3.1.20 roughly) it was trading at 1497.00 US per ounce. 2 years later? 1944.00 US per ounce that’s nearly a 30% return. Oil, wheat, Silver you can go figure it out, they are mostly up. The point here is you are seeing these items increase because the market is changing. The war in Ukraine effects commodities, specifically Wheat as Ukraine is a huge Wheat producer but what happens when markets change (with the many factors listed in this narrative) commodities tend to rise.

There is no sure thing in investing, its always a rollercoaster.

Ideally what you want to do is use the current financial climate as notice on how to diversify your portfolios going forward. Gold as an example, will come down. Should you go heavy into gold when it does? No, you should consider SOME gold though. 2-5% of your portfolio is what I recommend to family & friends buying at a low (I use 3-5 year price averages myself). Wheat will be another one that spikes soon, keep an eye on that.

Overall, commodities are a useful buttress for lower stock values. If you weren’t in commodities prior watch the prices in 2022 it’s going to be a good year to gauge your comfort level with commodities. Just like stocks it’s a gamble, but sometimes when you gamble you win and had you bought Gold (as an example) years ago and stayed with it, you would have a spectacular sell opportunity now to make some great gains.

Always be diligent when investing and don’t close your mind off to any specific sector of the markets. A diverse portfolio that takes a long term view on investments is prudent. Commodities are a big driver in markets (look at oil prices), ignoring them as investments isn’t the smart play. Nor is using a large % of your investing resources and putting that into commodities. It’s a sell position now. Take your gains if you have them and remember the simple phrase “buy low sell high” should always be paramount.

Source for Gold comparison:

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Finance – 3 tips to deal with this downturn

Inflation is real, gas prices in the U.S. will be 4.00 a gallon soon. Russia has invaded Ukraine; jobless claims rose in January. We are in a down turn period, these happen regularly. Is this a market correction? Partially, meaning a lot of the market has been inflated due to low interest rates so high amounts of capital were parked in stocks as CD rates were so low. The fed hasn’t raised rates enough to pull capital out so a true “correction” isn’t in play IMHO.

Covid shutdowns dramatically impacted the supply chain. On top of that governments subsidized citizens with money so you have the perfect storm of more cash in the economy and less goods. This always equals inflation when this occurs. The question becomes how long does it last? My initial guess was by the end of 2022 things would begin to even out. The mask mandates and locks downs are winding down, even with them in place people got covid. We have a war now, that’s a new circumstance.

I think this will go the same way the Crimea annexation went. A lot of saber rattling, sanctions and the people of Ukraine suffer. Simply put, Ukraine is not part of NATO and beyond the current president’s son’s income, there are no strategic interests of the U.S. at stake. It’s by no means a good situation but the predictions of WW3 and doom I think are very exaggerated (but not impossible). So we have a lot factors in play here, 2022 is going to be a down year economically. As I am writing this I think the market is down approx. 9.5% for the year and we aren’t finished with the 1st qtr. yet.

War sucks

How do you deal with it? I am going to give you 3 quick tips below that will help you navigate this down turn.

  1. Emergency fund: This should normally be 3-6 months of expenses; you now default it to 6. This is to help you weather inflation. If an emergency happens it’s going to cost, you more now than it did in prior years. Beef up your cushion.
  2. Secure your income sources: Down turns affect companies as well and if this extends to long (2 full qtr.’s) many companies will be looking to decrease expenses which usually means layoffs. Now is the time to make yourself as valuable as possible to your current employer. You should additionally be focusing on alternative income sources (side hustles) and if you had an idea now is the time to get it rolling.
  3. Hyper budget: This is a term used to really control spending. When things are good spending isn’t a big deal unless it’s a ridiculous expense. You should really be watching your budget closely and being very precise in your spending habits. This isn’t a long term effort here but for the next qtr. (3 months) really be sensitive to your spending habits and cut back where you can.

This slide will turn around, they always do. It’s not a matter of if it’s a matter of when. The only scenario where this continues to get worse and doesn’t improve is if the war in Ukraine expands. If Russia invades a NATO country, then all bets are off. You’re going to have much larger problems then a 6 month down cycle if that happens. For now, based on my experience I am betting on the side of a quick conflict and occupation and the damage economically to everyone outside of Ukraine subsiding in 6 months max.

That sucks for people in Ukraine, I don’t want this to seem unsympathetic to their plight but this is a finance piece not a political one. The U.S. every 20-30 years engages in a similar war (50’s Korea, 70’ Vietnam, 80’s Panama, 90’s Iraq, 2000 Afghanistan) so you have those historical markers to gauge the financial impact. In all cases markets and economic indicators dipped, commodities increased and the world has economic down turns for 2-6 months before things leveled off. I see that happening here, our economic issues are more than Ukraine. We were due for a correction, right now we are nearly at a -10% market for 2022 I think this trend will continue through the summer.

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Finance tip – The Credit Score Secret

So the first finance piece on the blog for 2022 but the same disclaimer…. I am finance professional with 30 years of experience. That said the views expressed on this blog regarding personal finance are my opinion and any financial decisions you make you should do so after having done your own personal research.

If you live in the western world you have a credit score. Now our friends in the east (our Asian and Australian friends) might have something similar, if they do I am not familiar with what it is but its yet another “number” you are given to identify your financial prowess. Now that we are in the midst of the digital age it is very easy to accumulate data on consumers.

Bitcoin is a game changer

Be under no illusion, every financial transaction you make is being stored in some data base and scrubbed as part of meta data for analytics. How many people bought tooth brushes in Dec as opposed to Feb… That data is then resold to manufactures and other large corporations for great profit. Let’s follow the example a bit further… Let’s assume that in Dec tooth brush sales are 300% higher than Feb. That’s critical information for someone who makes toothbrushes, that could be the lynch pin info that creates high profits for their company. You get the idea.

So you as a consumer are given a credit score. It has been pumped up and built up to be a reflection on your overall prowess as an economic entity. Potential employers will do a “credit check” on you. Some dating sites as part of the vetting system perform these checks as a service for their clients. You even have social conversations (well pre covid anyway) where people would actively talk about their credit score as if it were some bench mark for success.

Here is “The Credit Score Secret”

The credit scores purpose is to grade you on your ability to finance material items you can’t afford

Simply put, your credit score is a benchmark on your ability to make payments on items you can’t otherwise pay for outright. Its far more lucrative for a company to sell you something and have you pay overtime with interest. First, they make more over time due to interest and Second, they can up sell you additional services that complement the original purchase.

The bottom line is, you only need a credit score if you are buying something you can’t afford. In my opinion, the only case you should ever need this is when purchasing a house. You should not be buying other items unless you can pay for them outright, and yes that means cars too. I can bend a little on cars but you don’t need a 50K car, a 10K car will suffice. It’s another illusion the finance industry has created for you.

“Give them a score so they can measure themselves against others”. Its clever, sinister marketing. That score is a curse because it really means you have a high probability of purchasing things you can’t afford and paying for them over time. It’s an indication of how poor at finance you really are, financing a TV, A vacation, a phone… It means you’re willing to pay MORE than the item would normally sell for.

Don’t be fooled by the finance industry. They want you to be good little consumers. “payments” means “interest” and interest is pure profit for them. The item is still worth 20k regardless, but you, because you want it now are willing to pay 30K for it over 10 years because you want it now. Companies love that mentality and that is the “credit score secret”

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Advanced Finance Tip: Annual Gift Tax Exclusion

DISCLAIMER: Any financial advice I give on this blog is my opinion based on 30 years of working as a finance professional. Before making any financial decision do as much research as you can to make an informed decision.

So in the U.S. we have an extremely complicated tax code, its frankly ridiculous but that’s another blog post entirely. One of the issues the more fortunate of us face is how do we leave our money to our offspring without getting killed on taxes. This doesn’t apply exclusively to the rich either. Middle class Americans who have any amount of money face taxation on their net assets. The older you get the less you actually need your assets to survive. Specifically, there comes a point in your life where you have enough money that generates income that you will not have to compromise your principal.

Again, this isn’t for everyone… Many people live paycheck to paycheck but there are some of us who have a paid for house, a good chunk of change in our 401K’s and are debt free. We aren’t multi-millionaires but we do have money in excess of necessities. You may ask yourself “well Karac, why can’t I just spend it on all those things I wanted to do in retirement?” I would say to you “what things?”

There is this myth that once you retire there is glut of items or travel that you are going to purchase. You likely aren’t going to buy a new car, a 2nd house, travel 1st class. I mean you may, but average middle class people don’t do this regularly in retirement. Once in a while? Yes. So we are sitting on cash, when we die you aren’t going to care what your 401K balance is, your heir’s or the government WILL care because they benefit from it.

Decades later, they will pay taxes on their inheritance.

This is when all sorts of tax issues can happen and depending on the family dynamic horrible drama. There is an option and that is gifting money to your heirs now prior to your death. In 2021 the U.S. allows for a Gift Tax Exclusion of 15K per recipient. So if you had 150K you could gift 15K to 10 people and not have any tax implications. There is a life time limit to how much you can gift, its 11.7 mil which most of us are never going to hit.

So the tip: When you are starting your retirement planning, it may be prudent to calculate annual gifts to your heirs. It’s likely that the money now will help them more than money later as they can then take the gift and use it to supplement their current income. 15K is a lot of money. If you retire at 62 and live the average age (in the U.S.) of 82-84 (let’s say 83) that’s 21 years. 15K a year for 21 years = $315,000.00 that your heirs are not going to inherit and pay associated taxes on.

Again this is an advanced finance/retirement tip. You should be doing a lot of research and planning when you approach retirement. For a good article on Gift’s and Gift Taxes check out the article here.

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Finance Tip: How to pick great company stocks

First and foremost, let me say that I am not a financial advisor, any finance posts you see on this blog are my own opinion based on decades of being in the finance industry and living my life. Now disclaimer out of the way, there is a method by which you can pick single company stocks that normally beat the indexes. It is another one of those dirty little secrets that a finance professional won’t tell you, but with a little common sense you could figure out on your own.

To be clear, I am talking about stock in one company like Apple, not mutual funds. These come with a much higher risk as your money is tied to the performance of one company exclusively. This method is one that I have employed in the past when helping to set up an investment portfolio for someone in my family circle. It is by no means full proof or for that matter scientific (from a math perspective) at all. It relies on a very subjective business measurement, done by multiple firms.

So what is this method? It is tracking annual lists of “the best places to work”

I know that sounds half assed, simplistic and an uncouth way to make a stock pick. Here’s the thing though, if companies are listed as “best places to work” isn’t the logical conclusion that they must have happy workers? Happy workers usually mean better services and products and that usually means higher sales which equals revenue.

How much is this going to cost me ?

Don’t dismiss this simplistic formula out of hand. Here is a few of the companies that made it on to multiple best places to work for 2021:

  1. Microsoft
  2. Nvidia
  3. In & out burger
  4. Google
  5. Delta Airlines

These aren’t small companies, as a matter of fact most of the are publically traded and provide great dividends. Now this method of stock picking isn’t absolute, companies can fall off the list at any time but the metrics used to evaluate “best places to work” are usually worker centric. That’s the secret sauce here because as I stated, happy workers = good products & services = profits = return on investment.

There is no one catch all best places to work list you should use, there are hundreds of them (if not thousands). What you want to do here is aggregate several (5-10) lists. So if Nvidia appears on 7 out of 10 chances are that’s a great place to work and this investment strat should be employed.

This ties in well to another piece I did about Aristocrat stocks here, combined if you employ both for a mid to long term investment cycle (5-25 years) you should do very well. Remember investments into the stock market are not guaranteed and should be done only after doing research and obtaining a good comfort level.

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Finance Tip: Commercial real estate vs residential real estate

Another financial tip post for the moderate to advanced investor. Normal disclaimer: This is my personal opinion based on decades of work in the finance industry. The intent of this post is to give you my opinions, observations and insights into my experiences to help you gather a more robust knowledge base to help you make good financial decisions.

We are in a hot real-estate market right now. Historically low interest rates that have been sustained for decades by the federal reserve have (IMHO) negatively impacted housing prices. That’s issue 1, issue 2 is Covid and the rental issues we saw over the last few years. Depending on where you lived there were eviction moratoriums, rent relief, on and on.

The long and short of it is, it’s a sellers’ market. Houses are going for premium prices and it’s likely that on the next down cycle those houses will decrease in value leaving many new home owners in an upside down equity position. We have seen this many times in the past, housing goes up and down but over a 30-year period you will likely make money on the investment. The other issue there is many people aren’t spending 30 years in a residence anymore.

As an investor real-estate is a great investment because the down turns normally don’t last too long and even when your equity position has down cycled the asset is still generating income via rent. Land is an entirely different discussion as the asset value is really predicated on the anticipation of are growth so I am not going into that here at all. Residential vs Commercial though is a very important discussion and when (and if) you are at the point in your investing life that you want to get into real-estate its crucial to decide which way you want to go.

In a market like the one we have now, if you had a portfolio of residential properties you could flip it and make a killing, again it’s a sellers’ market. The issue with residential properties is, and always will be the landlord tenant relationship. Flipping houses is one thing, that in my mind is a commercial endeavor you are never renting this space you are purchasing an asset and reselling the asset. Residential real estate is a headache because you have tenants.

The housing market is on fire, buy low, sell high….

Of course you have steady income via rent, assuming they pay of course. The downside is you are trusting your asset to people whom are using the space to live. Unlike a commercial property where your tenants are using the space to generate income.

I bolded the above because it is the lynch pin in the advice. How people live has so many variables we can’t discuss them all in one post. As a landlord you are beholden to their lifestyle, they could be wonderful and have the same moral compass you do, or they may not. The worst part of residential real estate is when you sell (if you do) the residential value isn’t simply the location of the asset but how the asset was maintained and other residential locations in that area.

Commercial property? Its highly likely that a commercial renter is going to do their best to maintain and in some cases upgrade the property to make sure they can generate income from their rental investment. The residential tenant has no income potential from your condo, sure their quality of home life is impacted but they go elsewhere to get money to live. The Commercial tenant relies on your property to generate income so they can live their life.

Its logical then to conclude your best possible income outcome is from commercial property. They are more expensive but you are renting (leasing) your asset to someone else who has in their best interest to maintain and maximize your property so they make money. The lease payments come in every month, the property is maintained, the tenant makes money. Everyone is happy and your asset is much more secure.

The residential property? Maybe you got lucky and got a renter who cares. Maybe you didn’t. Anytime something happens at the residential property you have to fix it. The commercial property? They will likely do it and ask for a credit. Residential, you have to take care of it and that time cost is immeasurable. At the end of the day, Commercial properties are less headache and higher income potential due to less time investment required by the landlord.

Today’s real-estate market is hot and residential properties are through the roof. That 3 store strip mall that services those residential properties? It’s always there, it’s always got traffic regardless of how much houses cost.

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Finance secret finance professionals won’t tell you (but I will)

It’s time for another finance piece on the blog. Before we get to far in remember that any advice you see here is my opinion based on 30 years of experience working in the finance industry. You should always obtain as much information as possible before making any financial decisions, and not take one bloggers advice as gospel.

The basis for wealth is income. Surviving in today’s world you need money and the more of it you have the more you can secure positive future outcomes. Simply put, income allows you to purchase things to make life better. TV’s, Food, Furniture, Housing on and on. The more income you have the more wealth you accumulate and that allows for the ability to make those purchases over longer periods of time.

“What’s the finance secret then Karac?”

It pertains to how you obtain income. Most of us exchange our time for money, you are getting an hourly wage. Even salaried people, you equate the hours worked to the money received. The problem with this method is there is a fixed number of hours you can potentially work. So your plateau for this income model can be reached quickly.

More governments will start regulating Bitcoin in the next 3 years.

Sure you can change jobs and get a raise or get a promotion but you pretty quickly cap at that level as well. A few years go by maybe you get raise but overall you are stagnant you are not growing your income profile and your wealth building slows. That isn’t to say you can’t have a great life and build wealth in this model, millions have. However, it always requires you to live with less now so you can have the same later on.

The secret is results based income. Essentially sales or production. Most people do not have an income based on results. Income based on results nullifies the weakness of time based income because results directly correlate to your skill. What may take me 3 hours may take you 1. Let’s say we are selling a graphic design for 5K. You worked 5 hours on it, I worked 10. Effectively you made double what I did, for the same result because it took you less time. Had we both been time for money based, I would have made more money for the same outcome.

Results based income is a fantastic way to maximize your earning potential and so little people do it. The finance industry wants you locked in to the time based job, making a fixed amount and saving a fixed amount. This enables them to project their earnings based on your investment strategy. A results based income earner is a finance professional’s nightmare. You could earn 50K in a week and then not have income for 2 months.

How can I forecast my fee’s off your investing with that kind of income model? This is why they don’t tell you about this income and wealth building model. Yes, it’s hard to pull off, but results based income is a great way to make a lot of money quickly. How do you do this? Look at all the people on EBay, they are essentially working on result based income models. They sell more they make more. So ya they have to hustle to get the product but that’s the return for them.

You? Go to work for 10 hours a day and make “X” every day, regardless of how hard you work. Even as a side hustle, selling the result = the greatest income potential for you. People will by anything, there is great demand. Teach someone a language, cut lawns, clean gutters, make walking sticks, resell used clothes on and on and on.

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Beyond the Trees

Thank you !

Hey folks, not a formal post today taking a day or two off from articles/formal posts. I do want to take a moment and say thank you. Thank you for taking your time to read my blog, like my posts, your subscriptions. All that really means a lot to me, I am a small blogger and it does go a long way to keeping me motivated.

Again, thank you so much for your continued support of me and the “A Gen X Point of View” blog.

Your Pagan Friend,

Karac